Lehman Judge Fumes At RMBS Trusts' Distribution Moves
By Alex Wolf
Law360, New York (April 19, 2018, 10:22 PM EDT) -- Trustees for investors who bought toxic residential mortgage-backed securities from Lehman Brothers Holdings Inc. before the 2008 financial crisis got an earful Thursday from a New York bankruptcy judge who fumed that their concerns over how to distribute funds from a $2.4 billion settlement could have been raised months ago.
The hearing Thursday was put in motion by a group of institutional investors that want any matters regarding the distribution of their shared recoveries from the Lehman estate to take place in U.S. Bankruptcy Judge Shelley C. Chapman's court. (AP)
Counsel for U.S. Bank NA, Citibank NA and other trustees that fought a multiweek court battle to estimate claims against Lehman for selling billions of dollars’ worth of toxic home loans before its 2008 collapse drew heaps of scorn Thursday over how they have proceeded since U.S. Bankruptcy Judge Shelley C. Chapman determined the final amount of their Chapter 11 settlement last month.
The judge, who was not physically present but phoned into the hearing in her Manhattan courtroom, repeatedly admonished the trustees for seeking help from a New York state court judge earlier this month to determine how to distribute recovered funds to the RMBS investors instead of raising the same legal issue in her court.
“As you can tell, I’m quite unhappy that we have to deal with this issue,” Judge Chapman said.
The hearing Thursday was put in motion by a group of institutional investors that want any matters regarding the distribution of their shared recoveries from the Lehman estate to take place in Judge Chapman’s court. Attorneys for BlackRock, Goldman Sachs and other institutional investment firms sought to enjoin the trustees from bringing their proceeding in state court and delaying a current distribution of more than $800 million.
The trustees said they filed the so-called Article 77 petition in state court out of an abundance of caution because they did not want to risk violating the trusts’ governing agreements and failing to dutifully follow the “order of operations” for distributing the amount of funds they were ultimately deemed entitled to.
Attorneys for the trustees said that they sought the relief because there are varying economic consequences for the underlying investors based on the amount of money received. If the settlement sum had been higher or lower, the distribution scheme may have changed, said Glenn E. Siegel of Morgan Lewis & Bockius LLP.
Though incensed that the trustees waited until after the bankruptcy court proceedings had finished to raise their concerns about how to distribute settlement funds, Judge Chapman ultimately said she would allow the parties to appear in state court for the purpose of interpreting the governing agreement. But she said she will enter an order directing that the settlement agreement be enforced strictly in accordance with its terms.
The settlement amount at issue was decided in March after a trial-like claims estimation proceeding. Under the arranged deal, Lehman’s bankruptcy plan administrator agreed to seek estimation and allowance of $2.4 billion, and the trustees received the chance to fight for a higher amount.
During the proceedings, the trustees contended that there’s strong evidence that Lehman repeatedly breached its contracts on tens of thousands of misrepresented home loans, entitling them to a claim of approximately $11.4 billion.
But Judge Chapman ultimately found that the claims brought over the toxic securities were appropriately valued at around $2.38 billion.
The trustees are represented by Alston & Bird LLP, Mayer Brown LLP, Morgan Lewis & Bockius LLP, Faegre Baker Daniels and Hahn & Hessen LLP.
The institutional investors are represented by Becker Glynn Muffly Chassin & Hosinski LLP and Gibbs & Bruns LLP.
The bankruptcy is In re: Lehman Bros. Holdings Inc. et al., case number 1:08-bk-13555, in the U.S. Bankruptcy Court for the Southern District of New York.
